IS IT A PUZZLE TO ESTIMATE ECONOMETRIC MODELS FOR THE TURKISH ECONOMY?

Transcription

1 Marmara Üniversitesi İ.İ.B.F. Dergisi YIL 9, CİLT XXVII, SAYI II, S IS IT A PUZZLE TO ESTIMATE ECONOMETRIC MODELS FOR THE TURKISH ECONOMY? Aysu İNSEL *, M. Nedim SÜALP Abstract This paper examines the roles and interrelationships among the main instruments, namely the exchange rate, inflation rate, interest rate and the real GDP in Turkey. It provides a descriptive data analysis in order to understand the behaviour of each variable and to explain the relationship between them. The data analysis has been performed considering the original and the decomposed variables over the five periods: 1987:1-7:12; 1987:1-1994:3; 1994:4-1:1; 1:2-7:12; and 2:1-7:12. Different lengths of the sample periods are selected for each variable covering the economic crises and different policy applications in order to compare the reasons and the consequences of different economic policy applications on these variables. It is concluded that the distribution of economic series is changing from one period to another. The contribution of this paper is to develop a base for econometric model construction for the Turkish economy all the way through their contemporaneous and causal relationship for different sub-sample periods. Keywords: Inflation rate, Exchange rate, Interest rate, Real GDP, Descriptive Data Analysis, Turkey. * Prof. Dr., Marmara Üniversitesi, İ.İ.B.F., İngilizce İktisat Bölümü, Göztepe, İstanbul, e- mail: ainsel@marmara.edu.tr. Yrd. Doç. Dr., Marmara Üniversitesi, İ.İ.B.F., İngilizce İktisat Bölümü, Göztepe, İstanbul, nsualp@marmara.edu.tr. The authors acknowledge the research grant provided by Marmara University Scientific Research Projects Unit to produce the project (SOS-BGS ) called as An Analysis and the Estimation of the Turkish Business Cycles by Neural Networks which includes the original version of this paper. We thank Mesut Karakaş for his assistance. 21

2 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Özet Bu çalışma, Türkiye de döviz kuru, enflasyon oranı, faiz haddi ve reel GSYİH gibi temel değişkenlerin rollerini ve aralarındaki içsel ilişkilerini incelemektedir. Her bir değişkenin davranışlarını anlamaya ve aralarındaki ilişkileri açıklamaya yönelik bir betimleyici veri analizi sunmaktadır. Bu veri analizi ele alınan 1987:1 ile 7:12 döneminin tamamı ve ilgili değişkenlerin beş ana alt döneme ayrıştırılması temelinde gerçekleştirilmiştir: 1987:1-7:12; 1987:1-1994:3; 1994:4-1:1; 1:2-7:12; ve 2:1-7:12. Her bir değişken için farklı politika uygulamalarının nedenlerini ve sonuçlarını karşılaştırabilmek amacıyla iktisadi krizleri ve bu farklı politika uygulamalarını kapsayan farklı örnekleme dönemleri seçilmiştir.bu bağlamda iktisadi serilerin dağılımının bir dönemden diğerine değişmeler gösterdiği sonucuna varılmıştır. Çalışmanın katkısının Türkiye Ekonomisi üzerine yapılacak ekonometrik modelleme çalışmalarına farklı alt dönemler için eşanlılık ve nedensellik ilişkileri bakımından bir zeminin geliştirilmesi olacağı umulmaktadır. Anahtar Kelimeler: Enflasyon Oranı, Döviz Kuru,Faiz Haddi, Reel GSYİH,Betimleyici Veri Analizi, Türkiye. 1. Introduction The starting point of this analysis has originated from the following question: Is it a puzzle to make a model for/with exchange rate, interest rate, inflation rate and real income in Turkey? The reason is that the foreign exchange rate, interest rate and inflation rate have played important roles as the main policy instruments, and their roles and impacts have been changed by policy administrations since 19. In terms of policy evaluation, the exchange rate, interest rate and inflation rate have turned out to be of paramount importance. The performance of the economy has recently been closely linked to the inflation targeting policy through the determination of interest rates by the Central Bank. There has been a deep criticism that the imposition of this policy has caused the exchange rates to be over-valued leading to some structural imbalances in the economy such as high and persistent trade deficits. In accordance with the developments observed in the international trade and financial flows in the world economy, the exchange rate policies in Turkey have undergone some quite radical changes since the 19s, even though these changes took place with certain delays when compared to the impositions of the same policy instruments in some other countries. The reasons for these delays can be the lack of understanding of the policy makers in reading the developments and transformations in the world economy, and, hence, not being able to conduct the necessary policies in time. Yet another reason could be the structural problems and the ways the Turkish economy is articulated with the world economy, especially with the developed economies, necessitated rather relatively smooth transitions from one policy regime to the other. The second case appears to be particularly true when exchange rate movements are taken into account. The dependency of the production in Turkish economy on imported goods, not only on raw materials such as petroleum but also on a large variety of 22

3 inputs, makes Turkish economy highly sensitive to exchange rate movements. Therefore, it may be argued that the main concern of the Turkish policy makers have always been to keep exchange rates as smooth as possible and to let other related variables adjust accordingly. In Turkey, capital market was liberalised in 1989, and the TL became convertible and capital movements were deregulated. This arrangement resulted in the loss of power on foreign exchange rate controls. Higher interest rates attracted short- run foreign capital inflows and thus led to overvaluation of TL. Both the exchange rate and the interest rate were determined by the foreign economic forces after 1989, and fiscal deficit was financed by domestic borrowing. As domestic borrowing relied on foreign capital inflows, very short maturities on domestic debt resulted in high interest rates. Beginning from the second half of 1993, high public sector borrowing requirement (PSBR) put a pressure on the nominal interest rates on short term Treasury bonds, and hence they were lowered considerably. In April 1994 Turkish economy experienced a financial crisis. A large amount of capital outflow, a high level of demand for the US dollar and a fall in the Central Bank reserves resulted in more than 7% devaluation of the TL against the US dollar. The main sources of the April 1994 crisis were both the unsustainable domestic borrowing policy and the reflection of structural instability on nominal indicators, such as high level of current account and budget deficit, high PSBR, and high inflation, low (high) level of domestic saving (consumption). The exchange rate regime became the crawling peg. On April 5, 1994 Stabilization program was supported by a three year stand-by agreement with the IMF, and hence the stabilization strategy was based on a tight monetary policy and the real exchange rate targeting policy starting from early 1995 to the end of Interest rate policy was implemented to control exchange rate depreciation which was expected to be consistent with the implicit inflation targeting policy. The exchange rate regime was free floating between 1988 and 1994, but it became crawling peg (managed floating) regime after In January, the Central Bank moved to a preannounce exchange rate regime in order to reduce inflation. The Stabilization program was successful in reducing the inflation, but it could not succeed in preventing real exchange rate appreciation. The programme intended to keep depreciation of the TL equal to the wholesale price inflation target. Real exchange rate appreciated about 17% by the end of while inflation rate was more than 3%. In November, the domestic banking sector experienced a liquidity crisis and the market interest rates rose to high levels. As a result of the 21st of February 1 currency crisis, the exchange rate regime collapsed and the TL depreciated by more than %. Starting from November to February 1, inconsistent exchange rate policy with the targeted inflation rate resulted in a currency crisis. A severe recession led to an escape from the domestic currency and to an increase in the overnight interest rate from 5% to over 6%. The exchange regime was changed to the free floating regime abandoning the use of the exchange rate as the nominal anchor. Between 1997 and 2 in nominal terms, the Turkish Lira lost value by an average of 58.3% against the US dollar, but 23

4 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP increased after 2. It is clear that the April 1994 crisis was a financial crisis triggered by a high level of government debt, whereas the February 1 crisis was a banking sector and exchange rate crisis triggered by the exchange rate policy. Between 2 and 5, the economic restructuring performance, supported by the stand-by agreement which started in 2, brought a higher growth rate, a lower inflation rate, higher level of capital inflow and the revaluation of the domestic currency. In 5, six zeros were removed from the Turkish Lira and the Treasury started issuing long term bonds. These positive development signals pertained to the economic restructuring performance and maintained the implicit inflation targeting policy. Throughout the AK Party administration, the inflation rate has fallen and the value of the TL against the US dollar has increased. Interest rates, as the main policy instrument of the Central Bank, have been reduced by taking into account the inflationary expectations. The aim of this paper is to make a detailed data analysis, in the view of above information, in order to be aware of inconveniences with the available time series data in Turkey. With a purpose of sub-period analysis and decomposition, this paper reveals the shocks, outliers, erratic and persistent movements, and patterns or trends in the inflation rate, exchange rate, interest rate and real GDP. The analysis starts from January 1987 and ends in December 7. In this paper, data analysis is given in section 2 and the conclusion is presented in section Data Analysis The data has been obtained from the Central Bank of Turkey, and the analysis has been started in January 1987 and ended in December 7. The data set has been constructed backwards in time in order to solve the data revision problem and to achieve the accuracy of the analysis by relating to a high likelihood of reliable data. In this analysis, the monthly data on the nominal effective foreign exchange rate index (TL/$) and the ITO Istanbul Cost of Living Index for Wage Earners (1985=1) have been converted into year to year (annual) percentage changes. The exchange rate, interest rate and inflation rate series have been decomposed into the seasonal, trend-cycle and irregular components by the Tramo/Seats method, whereas the natural log of real GDP has been decomposed into seasonal, trend-cycle and irregular components by the X12-Census method. The HP filter has been used to separate the trend and cycle components for each of the series. Most of the economic time series tend to be characterized by the presence of clear cut(s), oscillations, and/or persistence. Economic time series generally exhibit the regular seasonal peaks and troughs related to the calendar effects (seasonal component), the long term movements or the direction of the data over time (trend component), the short term oscillations (cyclical component) and the short term neither systematic nor predictable random 24

5 fluctuations (irregular component). Since seasonal adjustment procedure removes seasonal fluctuations, the resulting series are much smoother than the original series. The seasonally adjusted series consist of the trend cycle and the irregular components. If the amplitudes of seasonal and irregular components do not change as the trend components changes, an additive decomposition model is the appropriate one. However, if their amplitudes change, then multiplicative decomposition model will be the appropriate one. Accordingly, in this analysis, an additive decomposition model has been employed for each series. In addition, the type of outlier(s) have been considered as the additive outliers (or shocks) since they refer to a temporary change in the character of data. There is no level shift type of outlier since none of the series displays a continuous jump after some point in time. Additive outliers in 1994 and 1 are expected to change the distribution of the variables and the trend-cycle and seasonally adjusted components are expected to be consistent. The original series is equal to the sum of the seasonally adjusted series and the seasonal factors. Since the seasonal components consist of reasonably systematic and stable effects with respect to timing, direction and magnitude, these effects are captured by the seasonal factors over time. Seasonal factors are calculated depending upon the patterns of the seasonal fluctuations that took place in the past years and upon the unknown pattern of seasonal fluctuations in years to come. This paper has examined the statistical characteristics of the foreign exchange rate (ė), the inflation rate ( ), the nominal interest rates (1 Month Deposit Rate: r 1M, 3 Month Deposit Rate: r 3M, 6 Month Deposit Rate: r 6M, 12 Month Deposit Rate: r 12M ), and the log of RGDP (RGDP). Thus there is an attempt to exploit the puzzle debate on the use of these policy variables in econometric modelling for the Turkish economy. Transforming and decomposing of time series together with the visual and descriptive inspections and the contemporaneous and causality relationships have facilitated a more efficient statistical analysis and provided a full examination of data. Figures have been used to illustrate and compare the movements of each series over the period 1987 to 7 through monthly data. Moreover, different lengths of the whole sample period have been selected for each variable in order to cover the economic crises and different policy regimes. In other terms, a subperiod analysis is expected to provide more information about not only the reasons and consequences of different economic policy applications, but also the statistical properties of the series. Thus the data analysis has been performed for each variable considering the original and the decomposed items over the five periods: 1987:1-7:12; 1987:1-1994:3; 1994:4-1:1; 1:2-7:12; and 2:1-7:12. Each sub-period includes a kind of economic crisis or an important policy decision. The first sub-period starts before the capital liberalization in 1989 and ends a month before 1994 crisis. The second sub-period starts with the April 1994 financial crisis and ends a month before 1 crisis. The third sub-period includes the February 1 currency crisis and ends in December 7. The fifth sub-sample comprises the AK Party administration performance. The April 1994 and the February 1 crises are 25

6 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP considered as the starting points of the samples in order to avoid the bias in the range of each data set and the impacts of economic policies Visual Inspection: Visual inspection is extended to the descriptive statistical analysis using the mean, the standard deviation, the skewness, the kurtosis, and the maximum/minimum values in order to provide a powerful statistical data analysis. In Figures.1a and 1b, the 3-dimensional sequential graphs display the spline-smoothed surfaces that have been fitted to each observations and successive values of the four variables in the forms of trend-cycle and cycle components. Their values are plotted along the X-axis with each successive series represented along the Y-axis. The two peak points show the 1994 April and the 1 February crises. Figure 1: Three Dimensional Views a: Trend Cycle Components b: Cycle Components Inspection of Figure.2 serves as an efficient tool of describing movements, outliers and/or level shifts in the original series. In Figure.2 (left panel) all the nominal interest rates (r 3M, r 6M, r 12M ) except one month deposit rate (r 1M ), follow similar patterns and they are more volatile between 1993 and 2 period. In Figure.2 (right panel) the movements in the change in dollar exchange rate, inflation rate, and the trend-cycle and seasonally adjusted components of log of real gross domestic product are plotted over the periods 1987:1-7:12. Detailed inspection of the decomposed series in Figure 3 to 5 provides a clear picture about the movements over the sub-periods. Figures 3, 4 and 5 display visible differences in the behaviour of variables over the periods 1987:1-7:12 (left panel, whole period) and 2:1-7:12 (right panel, the AK Party administration period). In Figure.3, interest rate (middle panel) and inflation rate (lower panel) follow similar pattern, while exchange rate (upper 26

7 panel) fluctuates up and down. In Figures.4 and 5, it is clear that there exist both erratic and persistent behaviour in the series in different sample periods. In addition, the movements of these variables have changed over time due to two severe disruptions in April 1994 and February 1. From a simple graphical examination, it can be seen that; (i) the deviations from trends show a non-constant cyclical pattern. The length of periods of oscillations and amplitudes are time varying, so as over the 2:1-7:12 period (right panel) the oscillations become shorter and the amplitude turns out to be lower; (ii) the exchange rate, interest rate and inflation rate follow a similar cyclical pattern, but they appear to be the follower or leader of each other depending upon the sample period chosen; (iii) there is a decreasing variability at the end of period; (iv) the existences of nonlinear trends in rates, whereas linear trend in real GDP give some information about the long run pathways; (v) the real GDP follows a persistent pattern; (vi) from the sub-period analysis, the exchange rate, the interest rate, and the inflation rate have downwards trends after 1994 crisis; further, the non-linear trend components reveal a constant pathway, mainly after 5. 27

8 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Figure 2: Variables of Interest: (1987:1 7:12) NOMINAL INTEREST RATES R1 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 R3 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 R6 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 R12 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6: CHANGE IN NOMINAL EXCHANGE RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INFLATION RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 REAL GDP_TREND-CYCLE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 REAL GDP_SEASONALLY ADJUSTED 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:

9 Figure 3: Behaviour of the Trend-Cycle Components MACROECONOMIC INDICATORS: 1987:1-7:12 EXCHANGE RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INTEREST RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INFLATION RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6: MACROECONOMIC INDICATORS: 2:1-7:12 EXCHANGE RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 INTEREST RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 INFLATION RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:

10 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Figure 4: Behaviour of the Cycle Components MACROECONOMIC INDICATORS: 1987:1-7:12 REAL GDP 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 EXCHANGE RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INTEREST RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INFLATION RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6: MACROECONOMIC INDICATOR REAL GDP S: 2:1-7:12 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 EXCHANGE RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 INTEREST RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 INFLATION R ATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:

11 Figure 5: Behaviour of the Trend Components MACROECONOMIC INDICATORS: 1987:1-7:12 REAL GDP 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 EXCHANGE RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INTEREST RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INFLATION RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6: MACROECONOMIC IND ICATORS: 2:1-7:12 RE AL GDP 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 EXCHAN GE RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 INTE REST RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:7 INFLA TION RATE 3:1 3:7 4:1 4:7 5:1 5:7 6:1 6:7 7:1 7:

12 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Scatter diagrams have been used to represent the linear relationship between two series for the different ranges of sample period. This inspection provides information about the strength, shape and direction of the relationship as well as the presence of outliers. Examination of the scatter diagrams discloses the existence of any (mutual) contemporaneous linear relationship between two variables. A linear regression line is drawn through the each scatter plots in order to show the type of relationship between two variables, and also to detect the outliers. In Figure.6, there are four columns in which the first and the third columns show the relationship between two variables for the whole period, and the second and fourth columns show the relations over the AK Party period. Inspection of each plot suggests that there is not a strong contemporaneous linear relationship between these variables. It is important to note that contemporaneous movements in each variable cannot be explained by the other one in a linear context and they deviate from a linear path for different sample periods. These results are not unexpected, since the sequential-annual changes are not equal to each other in each variable. In Figure.7-first and third columns, each variable shows a clockwise and upswings-looped path rather than a stable sloped line. The second and fourth columns reveal that exchange rate is always below inflation rate (second columnlower panel) except for the periods of crises and it is below interest rate (second column-middle panel) until 1. Moreover, inflation rate is below/above interest rate up to 2, and then it is always below interest rate (second columnupper panel). These findings show that movement and the relationship between these variables vary over time period with respect to preceding economic policy and economic crisis. 32

13 Figure 6: Inspection of Linear Relationship INTEREST RATE REAL GDP INTEREST RATE INFLATION RATE INFLATION RATE INTEREST RATE REAL GDP REAL GDP REAL GDP EXCHANGE RATE EXCHANGE RATE INTEREST RATE INTEREST RATE REAL GDP REAL GDP EXCHANGE RATE EXCHANGE RATE INFLATION RATE INFLATION RATE INTEREST RATE EXCHANGE RATE EXCHANGE RATE INFLATION RATE INFLATION RATE 33

14 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP INTEREST RATE :1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INTEREST RATE EXCHANGE RATE 16 1 EXCHANGE RATE LOOPS AND MOVEMENTS INTEREST RATE :1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 INTEREST RATE INFLATION RATE INFLATION RATE 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 EXCHANGE RATE INFLATION RATE REAL GDP :1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 8:1 REAL GDP EXCHANGE RATE EXCHANGE RATE INFLATION RATE E X C H A N G E R A T E REAL GDP :1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 8:1 REAL GDP INFLATION RATE I N F L A T I O N R A T E REAL GDP Figure 7: Looped Paths and Movements: (1987:1 7:12) 88:1 9:1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 8:1 REAL GDP INTEREST RATE I N T E R E S T R A T E 34

15 2.2. Descriptive Inspection Visual inspection has been extended to the descriptive inspection using the mean, the standard deviation, the skewness, the kurtosis, and the maximum/minimum values in order to provide a powerful statistical data analysis. It is believed that most of the economic time series do not fulfil the independent Gaussian distribution. A common problem in the economic time series is the presence of persistence. In general, there is a tendency for large (small) values to be followed by large (small) values. For example, during some periods, interest rate and exchange rate series exhibit persistence because these variables are usually used as the policy instruments, thus their behaviour cannot be arbitrary. Moreover, real GDP includes stochastic or deterministic trend and hence shows persistence. Another problem in the time series is the (large) fluctuations. So, the knowledge of these problems is crucial in econometric modelling and forecasting. It is more convenient to start with the interest rates and the related descriptive statistics displayed in Table.1, in appendix. All interest rates move towards the similar rates within each sub-sample period, but the average rates vary from one sub-sample to another. The largest value of the standard deviation is on the one-month deposit rate during 1:2-7:12, whereas, the lowest standard deviation is for the sample period 2:1 to 7:12 being consistent with the foregoing policy applications. Additionally, the highest interest rates on 3, 6, and 12 month deposits over the 1994:4 and 1:1 periods due to debt financing, whereas the highest rate is on one-month deposit rate in 1:2 and 7:5 period owing to insufficient liquidity. The results in Table.1 present that the kurtosis coefficient is different than three, and the skewness coefficient is different than zero for some sample periods. Specifically, the skewness and kurtosis coefficients for nominal interest rates show that there is a substantial deviation from normal distribution. It can be detected that the kurtosis coefficient is low for the whole sample period, except r 1M, and its value varies for five different samples. High kurtosis coefficients reveal that fluctuations in a variable are wide in some periods, but smooth some other periods. Thus high shocks (outlier) are followed by high shocks, and hence the variance varies over time. During the AK Party administration, interest rates decreased to the lowest average levels and all the rates have turned out to be closer to each other. The instability in the nominal interest rates has decreased towards the current period. Since the Central Bank has been using the interest rate as the policy tool in order to attain the inflation targeting policy, it has managed to eliminate the volatility in interest rate. The examinations of different nominal interest rates on deposits have shown that the distribution of these rates have varied over time considerably. In this paper, the 12-month nominal deposit rate has been chosen following the selection criterion based on the stability of interest rate. 35

16 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP The original rates and the seasonally adjusted real GDP series have been described in Tables 1 to 3 in appendix and in Table 4 in appendix, respectively. Table 2 shows that exchange rate has a kurtosis coefficient exceeding 3 and a skewness coefficient ranging between 1.9 and 1.75, except for the 1987:1-1994:3 and 2:1-7:12 sub-periods, implying the periods of turbulence with large exchange rate changes. In Tables 3 and 4, inflation rate and real GDP have lower skewness and kurtosis coefficients relative to the other two variables, respectively. In Tables 5 to 9 in appendix, the descriptive statistics are defined for the three components, namely trend-cycle, cycle and trend. These results mimic an important feature that the movements in all of these variables are characterised by the tranquil periods and crisis periods Contemporaneous and Causality Relationships Both the simple correlation and cross correlation coefficients are more accurate and comprehensive quantitative measures to assess the strength, the timing, and the direction of the relationship between variables. Linear nature of the contemporaneous relationship between two random variables in different sample periods is described by the simple correlation coefficient, whereas a phase relationship between two variables is classified by the cross correlation coefficient. Thus the direction and the time patterns of the variables of interest have been determined in order to provide some signals about the policy impacts. Table 1 in appendix, displays the correlation coefficients between each variable in different sample periods and for different components. The relevance of the correlation analysis is twofold: First, the separation of the sample into five periods increases the understanding of the related economic policies and helps to construct empirical models for estimation and forecasting; second, the consideration of components utilizes the information both on short and long term co-movements. Along with the above argument, although the simple correlation coefficients are high for the whole sample period, there are noticeable differences across each sub-period. Concerning the components, the correlation coefficients for the original series and trend-cycle components are very similar, but they are different for the cycle and trend components. The original and trendcycle components of exchange rate, inflation rate, interest rate and RGDP are highly correlated before the AK Party period. During 2:1-7:12, the correlation coefficients with exchange rate have declined significantly, but the correlation of interest rate with inflation rate is much stronger as compared to those between exchange rate and other two variables. Although the trend components are highly correlated, the cycle components show low correlations. In other terms, the short run strength of movements is weak, but the long run strength is strong. The correlation analysis has been completed with the cross correlation analysis. This analysis has provided information about the existence of high/low linear dependency between two variables and the impacts of different economic policy rules. Calculated linear cross correlation coefficients are displayed in Tables 11 and 12, in appendix. An investigation of cyclical components for the 36

17 first four sample periods indicates that exchange rate is the leading indicator of inflation rate. Interest rate is the leading variable for exchange rate, inflation rate and real GDP during the periods. However, interest rate becomes a leader only for inflation rate, while exchange rate leads both interest rate and inflation rate through the 1:2-7:12 periods. They all have the positive correlation, but RGDP is the leading and counter-cyclical indicator of all three variables. During the AK party administration period, exchange rate has a considerably low correlation both with inflation and interest rates, but interest rate is the leading indicator of both inflation rate and RGDP. Both exchange rate and inflation rate follow RGDP. Therefore, there is clear evidence that the key leading policy instrument is the exchange rate in the Turkish economy. Existence of some causal relationship between economic variables indicates a non-contemporaneous relationship between them. The Granger causality test with one lag has provided a basis for addressing a feedback effect of one variable on another. Table 13 in appendix provides a detailed description of the causality relationships. Regarding the causality relationship between the original series, particularly during the AK party period knowing that the interest rate is the policy instrument, exchange rate causes both interest rate and inflation rate; and inflation rate causes interest rate, but no causality exists between the RGDP and other variables. On the other hand, inspections of the trend-cycle components expose that exchange rate causes inflation rate, interest rate and real GDP. It can be seen that there is not an apparent and stable causality pattern between these variables across different sample periods; however, it is clear that exchange rate is the fundamental variable in the Turkish economy. As a result, the evaluation of statistical data analysis has proved that the distribution of economic series is changing from one period to another. In this stage, it is important to remember the time invariance and independency properties of time series in the econometric model construction. However, most of the econometric models have been constructed for the longest sample periods using exchange rate, inflation rate, interest rate in Turkey, even if these variables are not generated from an independent stationary process. 3. Conclusion This paper has been motivated to develop a detailed data analysis for the exchange rate, inflation rate, interest rate and real GDP series in Turkey from 1987 to 7 using monthly data. A rather detailed and comparative elaboration of data provides some answers to the following questions: (i) Is it possible to solve the puzzle of constructing econometric models for longer periods even if the distribution of these series changes from one period to another? (ii) Is it possible to build a model for policy evaluation and forecasting if this series cannot achieve the time series properties? (iii) What is the best period (length) to construct an econometric model with volatile, changing, delayed, nonlinear, and complex nature of these series? This paper has provided the answers to above questions by examining the movements and interrelationships between the three main policy instruments and the real GDP in Turkey. Statistical evaluation of this data analysis has proved that the distribution of economic series has changed from one period to 37

18 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP another, implying the relative importance of sub-period analyses corresponding to the different policy environments and solving the puzzle defined in this study. Therefore, it could be suggested that, at a cost of using smaller sample sizes, a better understanding of the relationship between the variables at hand could be achieved by the investigation of the sub-periods corresponding to the different policy environments. 38

19 REFERENCES INSEL, A., The Relationship Between Macroeconomic Policy and Performance Indicators in the Turkish Economy and an Inflation Analysis, İşletme ve Finans, May 1, Vol.182. INSEL, A. and Sungur, N. The Impact of Foreign Capital Flows on the Main Macroeconomic Indicators-Turkish Case: 1989.Q Q4", Türkiye Ekonomi Kurumu Tartışma Metinleri (Turkish Economic Association Discussion Paper), December 3, No: 8. INSEL, A., Soytas M. A., and Gunduz S., The Direction, Timing and Causality Relationships Between The Cyclical Components of Real and Financial Variables During the Financial Liberalization Period in Turkey, Türkiye Ekonomi Kurumu Tartışma Metinleri (Turkish Economic Association Discussion Paper), 4, No.1. INSEL A. and Süalp, M. Nedim, An Analysis and Estimation of the Turkish Business Cycles by Neural Networks, Marmara University Scientific Research Projects Unit, SOS-BGS , Marmara University, Istanbul 8. KARA, A.H., Turkish Experience with Implicit Inflation Targeting, Research and Monetary Policy Department Working Paper, The Central Bank of the Republic of Turkey, 6, 6/3. OZDEMİR, K.A., Sahinbeyoglu, G., Alternatif Döviz Kuru Sistemleri, Tartışma Tebliği, TCMB Araştırma Genel Müdürlüğü,. 39

20 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Appendix: Table 1: Nominal Interest Rates (Original series) STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 2:1-7:12 r 1M Mean Standard Dev Maximum Minimum Skewness Kurtosis r 3M Mean Standard Dev Maximum Minimum Skewness Kurtosis r 6M Mean Standard Dev Maximum Minimum Skewness Kurtosis r 12M Mean Standard Dev Maximum Minimum Skewness Kurtosis

21 Table 2: Exchange Rate (ė) (Original series) STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 2:1-7:12 Mean Standard Dev Maximum Minimum Skewness Kurtosis Table 3: Inflation Rate (π) (Original series) STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 2:1-7:12 Mean Standard Dev Maximum Minimum Skewness Kurtosis Table 4: Real GDP (Seasonal adjusted) STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 2:1-7:12 Mean Standard Dev Maximum Minimum Skewness Kurtosis

22 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Table 5: (ė) Components STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 Trend-Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Trends component Mean Standard Dev Maximum Minimum Skewness Kurtosis Table 6: (π) Components STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 Trend-Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Trends component Mean Standard Dev Maximum Minimum Skewness Kurtosis

23 Table 7: (r 12M ) Components STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 Trend-Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Trends component Mean Standard Dev Maximum Minimum Skewness Kurtosis Table 8: (RGDP) Components STATISTICS 1987:1-7: :1-1994:3 1994:4-1:1 1:2-7:12 Trend-Cycle component Mean Standard Dev Maximum Minimum Skewness Kurtosis Cycle component Mean.... Standard Dev Maximum Minimum Skewness Kurtosis Trends component Mean Standard Dev Maximum Minimum Skewness Kurtosis

24 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Table 9: Components: AK Party Period: 2:1-7:12 RGDP ė π r 12M Trend-Cycle component Mean Standard Deviation Maximum Minimum Skewness Kurtosis Cyclical Component Mean Standard Deviation Maximum Minimum Skewness Kurtosis Trend Component Mean Standard Deviation Maximum Minimum Skewness Kurtosis

25 Table 1: Correlation coefficients: Original and Components 1987:1 7: :1 1994:3 1994:4 1:1 1:2 7:12 2:1 7:12 Original ė and π ė and r 12M π and r 12M RGDP and ė RGDP and r 12M RGDP and π Trend-Cycle ė and π ė and r 12M π and r 12M RGDP and ė RGDP and r 12M RGDP and π Cycle ė and π ė and r 12M π and r 12M RGDP and ė RGDP and r 12M RGDP and π Trend ė and π ė and r 12M π and r 12M RGDP and ė RGDP and r 12M RGDP and π

26 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Table 11: Cross Correlations 46 ė and π ė and r 12M π and r 12M RGDP and ė RGDP and r 12M RGDP and π ė and π ė and r 12M π and r 12M 1987:1-7: : :3 1994:4-1:1 1:2-7:12 Trend-Cycle Lead=Lag= r= Lead=Lag= r=.81 Lead=Lag= r=.62 Lead=3 r=.81.7 ė is the leading indicator Lead=Lag= r=.78 Lead=Lag= r=.92 Lead=Lag= r= -.45 Lead=Lag= r= -.55 Lead=4 r= -.65 RGDP is the leading indicator Lead=2 r=.81 ė is the leading indicator Procyclical Lead=Lag= r=.53 Procyclical Lag=1 r=.45 r 12M is the leading indicator Procyclical Lead=Lag= r=.89 Lead=Lag= r=.64 Lead=3 r=.37 RGDP is the leading indicator Lead=Lag= r=.56 Lead=Lag= r=.34 Cycle Lead=1 r=.69 ė is the leading indicator Procyclical Lead=Lag= r=.85 Procyclical Lead=1 r=.63 π is the leading indicator Procyclical Lead=Lag= r=.51 Lead=Lag= r=.75 Lead=Lag= r= -.63 Lead=Lag= r= -.58 Lead=Lag= r= -.72 Lead=2 r=.86 ė is the leading indicator Procyclical Lag=1 r=.47 r 12M is the leading indicator Procyclical Lag=5 r=.37 r 12M is the leading indicator Procyclical Lead=Lag= r=.79 Lead=Lag= r=.95 Lead=Lag= r= -.71 Lead=Lag= r= -.91 Lead=Lag= r= -.87 Lead=3 r=. ė is the leading indicator Procyclical Lead=2 r=.58 ė is the leading indicator Procyclical Lag=1 r=.64 r 12M is the leading indicator Procyclical

27 RGDP and ė RGDP and r 12M RGDP and π Lead=Lag= r= -.56 Countercyclical Lag=1 r= -.65 r 12M is the leading indicator Countercyclical Lead=3 r= -.45 RGDP is the leading indicator Countercyclical Lag=1 r= -.69 ė is the leading indicator Countercyclical Lag=1 r= -.63 r 12M is the leading indicator Countercyclical Lag=2 r= -.49 π is the leading indicator Countercyclical Lead=Lag= r= -.47 Countercyclical Lag=2 r= -.75 r 12M is the leading indicator Countercyclical Lead=3 r= -.34 RGDP is the leading indicator Countercyclical Lead=1 r= -.7 RGDP is the leading indicator Countercyclical Lead=3 r= -.58 RGDP is the leading indicator Countercyclical Lead=1 r= -.59 RGDP is the leading indicator Countercyclical 47

28 Prof. Dr. Aysu İNSEL* Yrd. Doç. Dr. M. Nedim SÜALP Table 12: Cross Correlations -AK Party Period-2:1-7:12 ė and π ė and r 12M π and r 12M RGDP and ė RGDP and r 12M RGDP and π Trend-Cycle Lead= 4 r=.26 ė is the leading indicator Lead= 1 r=.37 ė is the leading indicator Lead=Lag= r=.93 Lead=Lag= r= -.16 Lead=Lag= r= -.79 Lead=Lag= r= -.74 Table 13: Causality Relationship: (lag value: 1) 1987:1-7:12 Cycle Lead= Lag= r= -.2 Lead=Lag= r=.9 Lag= 5 r=.54 r 12M is the leading indicator Lead= 4 r=.49 RGDP is the leading indicator Acyclical Acyclical Procyclical Procyclical Lag= 2 r= -.43 r 12M is the leading indicator Countercyclical Lead= 2 r= -.26 RGDP is the leading indicator Countercyclical 1987:1-1994:3 Original 1994:4-1:1 1:2-7:12 ė and π ė causes π no causality ė causes π ė causes π ė and r 12M no causality ė causes r 12M no causality no causality π and r 12M no causality no causality no causality r 12M causes π RGDP and ė no causality no causality no causality no causality RGDP and no causality no causality no causality r 12M causes r 12M RGDP RGDP and π RGDP causes π no causality RGDP causes π no causality Trend-Cycle ė and π ė causes π no causality no causality ė causes π ė and r 12M no causality ė causes r 12M no causality ė causes r 12M π and r 12M π causes r 12M no causality no causality no causality RGDP and ė no causality no causality no causality no causality RGDP and r 12M causes no causality r 12M causes no causality r 12M RGDP RGDP RGDP and π RGDP causes π no causality RGDP causes π no causality 2:1-7:12 Original Trend-Cycle ė and π ė causes π ė causes π ė and r 12M ė causes r 12M ė causes r 12M π and r 12M π causes r 12M π causes r 12M RGDP and ė no causality ė causes RGDP RGDP and no causality r 12M causes RGDP r 12M 48